Bad credit raises cost of insuring car, home

Natalie Roman was an insurance agent's dream customer, a driver without violations or accidents who hadn't filed auto-damage claims in more than a decade.

Natalie Roman was an insurance agent’s dream customer, a driver without violations or accidents who hadn’t filed auto-damage claims in more than a decade.

Yet her monthly car-insurance rate doubled to about $80 late last year after her insurance company raised its overall rates and checked Roman’s credit score.

The Grandview Heights woman had a decent credit score, but it had dipped somewhat after she moved out on her own and struggled to pay some bills on time.

Roman’s credit score is improving now, but she had no idea that the past stain on her credit history could cause her to pay more.

“I felt a little betrayed, because I had a perfect driving record and I’ve been with the same company for 12 years,” said Roman, 32, a program assistant at the Arthur G. James Cancer Hospital. “ It didn’t seem right that my credit score was being used to judge me in that way.”

Most consumers are aware that their credit history weighs heavily on how much they pay to finance a home or car, but far fewer realize that it affects their insurance policies.

A vast majority of companies offering personal auto and home insurance use consumers’ credit scores when deciding whether to issue or renew a policy, and how much to charge for premiums.

For insurers, the correlation between credit scores and claims is clear: Drivers and homeowners with less than stellar credit reports file more claims than those with strong credit histories.

The practice, which began about 20 years ago, is permitted under the Fair Credit Reporting Act and state laws in Ohio and all but four states. Those same laws also require insurers to notify consumers, typically with an “adverse action” letter, when something in their credit report denies them insurance, causes their rates to increase or changes their coverage in some way.

“Evidence that poor credit scores are associated with higher losses is incontrovertible,” said Bob Hartwig, president of the Insurance Information Institute in New York.

Insurers say consumers who are responsible when it comes to their finances also are likely to change aging tires, keep their brakes repaired or fix the hole in the roof of their home.

If anything, Hartwig said, the use of consumer credit histories actually has brought more competition to the industry and allowed insurers to more accurately price the risk of policies. It also has allowed insurers to better price policies for risky drivers, he said.

But consumer advocates say the practice is harmful, discriminates against minorities and those with lower incomes, and is unfair to people whose credit may be damaged because of hardships such as illness, job loss or divorce.

Consumer advocates estimate that only about a third of consumers are aware that their credit histories are used by insurance companies. They say consumers who learn of the practice resent it and question how a credit score can determine whether someone is a safe driver or will take better care of their home.

“Insurers do very little to let the consumers know they are using their credit histories, and if consumers had a choice, most would say, ‘I don’t want this because it’s ridiculous,’??” said Birny Birnbaum, executive director for the Center for Economic Justice in Austin, Texas.

“They use credit histories because they are looking for the people they can profit most from. Insurance shouldn’t be about segregating the population into winners and losers,” he said.

The debate further heightens the importance of accurate credit reports, especially because the law requires consumers to have auto insurance, and lenders require insurance when purchasing a home. A yearlong Dispatch series published last month detailed the flaws of the national credit-reporting system, including how consumers’ financial lives are damaged by errors on their credit reports.

As part of the “Credit Scars” series, The Dispatch reviewed more than 30,000 consumer complaints from the federal government and in 24 states. While few complained directly about insurance, some said the account or factual errors on their reports had caused them to be denied insurance or pay higher rates.

“All the errors and problems with credit reports hurt in a number of ways, but the impact is more widespread in the insurance world because almost all of us have to have insurance,” Birnbaum said. “A lot of people are trapped in a system that doesn’t favor them.”

History in insurance

The use of credit-based insurance scores to help set premiums became more prominent in 1993.

That was when FICO, the company known for developing the credit score that lenders use most, introduced credit-based insurance scores for homeowner policies. That was followed by auto policies in 1995. The scores are designed to provide insurers an assessment of consumers’ insurance risk at a particular point in time.

It is one of many factors that they consider in pricing policies.

Research supported FICO’s premise that an insurance score could predict future auto and home insurance losses.

“The way in which people manage their lives, particularly their financial lives, has a strong bearing on the way they manage the rest of their lives,” said Lamont Boyd, FICO’s director of insurance scores.

Most consumers actually benefit from insurance scores, he said. It allows insurers to better price policies and offer steeper discounts to those with the highest scores.

Insurance score

Similar to the FICO credit scores that range from 300 to 850, insurance scores go from 300 to 900, Boyd said.

Boyd said the most-significant factor for determining an insurance score is payment history. It amounts to about 40 percent of the score. Other key factors include whether the consumer has been delinquent on credit accounts and by how much and also how much of their available credit they use.

How insurers use insurance scores to set premiums varies considerably from one company to the next. It is one of a number of factors that insurers consider in setting rates.

The difference in cost can be substantial.

Some carriers have more than 20 tiers that they use to place customers with various insurance scores, said Ron Mooney, owner of RHK Group, an independent insurance agency in Dublin with about 5,000 clients.

If a client drops from one tier to the next, the policy cost probably would be a couple of percentage points, he said, assuming all factors in setting the policy remain the same. A big change in scores could produce differences of up to 40 percent, he said.

Industry executives say they rarely if ever have had a situation in which they could not find an insurance policy for someone just because of a poor insurance score, especially in Ohio, where there is stiff competition among insurers and rates are among the lowest in the country. They also say bad credit might raise the cost of a policy for consumers, but it typically won’t keep a consumer from getting a policy.

“If the client’s score has deteriorated for some reason, it may be difficult for us to compete with their current policy’s rate,” Mooney said. “Of course, the opposite is also true. If a client’s score has improved over that time, it may be very easy to find a better rate.”

Confusing calculation

Part of the frustration from consumers is not knowing exactly why they are considered more of a risk even when their credit score remains the same.

That was the case with Kevin Dorgan when he moved from Raleigh, N.C., to Grandview Heights in late 2010 and was told by his auto insurance company that his low credit score had caused his monthly rates to increase by about 20 percent.

Dorgan, 52, had gone through a divorce, contributing to a drop in his credit score, but the score and his clean driving record were the same in Ohio as in North Carolina, where his rates were lower.

“I was mildly upset, because I’m the same driver, have the same car and know I’m the same risk,” said Dorgan, a corporate social-media consultant.

However, Dorgan experienced the other side of the debate while working as an underwriter for Nationwide for about eight years. He said people were routinely rejected for policies because of bad credit.

“I know people don’t like the practice, but there was no doubt people with credit problems were more likely to file more claims or even false claims,” he said.

Still, consumer advocates don’t buy the logic from a system that they say leaves people vulnerable.

“It’s a bad thing for so many reasons, but overall, the practice just doesn’t make any sense,” said Chi Chi Wu, staff attorney at the National Consumer Law Center in Boston, which advocates for consumer rights and protections. “My husband would tell you I have a good credit history, but I’m a really bad driver. And he would be right, I’m not a very good driver, but what does that have to do with my credit score?”

mwagner@dispatch.com

@MikeWagner48

mawilliams@dispatch.com

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